Groupon, Inc.

Good day, everyone, and welcome to Groupon's 4th Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the company's formal remarks. To ask a question, press the star key followed by the number 1 on your touchtone phone. Once again, press star 1 to ask a question. Today's conference call is being recorded. For opening remarks, I would like to turn the call over to Chief Communications Officer Jennifer Bugelmans. Let's go ahead.

Good morning and welcome to Groupon's fourth quarter 2020 financial results conference call. On the call today are our interim CEO, Aaron Cooper, and CFO, Melissa Thomas. The following discussion and responses to your questions reflect management's views as of today, February 26, 2021 only, and will include forward-looking statements. Actual results may differ materially from those expressed or implied in our forward-looking statements. Additional information about risks and other factors that could potentially impact our financial results is included in our earnings press release and in our filings with the SEC, including our annual report on Form 10-K. We encourage investors to use our investor relations website at investor.groupon.com as a way of easily finding information about the company. Groupon promptly makes available on this website the reports that the company files or furnishes with the SEC, corporate governance information, and select press releases and social media postings. On the call today, we will also discuss the following non-GAAP financial measures. and many more. And with that, I'm happy to turn the call over to Aaron. Thanks Jennifer.

And thanks to you all for taking the time to join us today. I'm excited to update you on how we finished 2020 and our plans for 2021. As I reflect on this past year, I, like so many others I'm sure, go immediately to the challenges we all faced. But it's also very important for me to acknowledge the resilience that our merchants, customers, and employees have shown during these unprecedented times. When I think about Groupon and how far we've come over the past year, I'm so proud of the hard work our team has poured into creating a path to growth. We went from local units being down nearly 80% and generating negative adjusted EBITDA to delivering 50 million of adjusted EBITDA for the full year 2020, taking significant fixed costs out and strengthening our balance sheet. On top of improving our financial results, we also transitioned our North American goods category to a third-party marketplace and developed and began executing on a strategy that fundamentally addresses our merchant and customer value propositions. We built new muscle in 2020. We're moving faster, empowering our teams and focusing on the most important opportunities. In short, we believe we're on a path to growth. As we move into 2021, we're excited about our path, which we believe will include a second half organic recovery tailwind. This tailwind, coupled with a meaningfully lower fixed cost base, should allow us to drive sequentially improving gross profit and adjusted EBITDA as we progress throughout 2021. We believe this anticipated recovery scenario provides a framework for how to think about the base case for Groupon, which would suggest meaningful progress from where we are today. At just 80% of our 2019 gross profit level, we believe we can deliver $250 million in adjusted EBITDA in 2022. of course however our intention is to grow and this year you will see us continue to execute on our two strategic priorities expanding inventory and modernizing the marketplace in 2021 our goal is to bring these two priorities together to position Groupon for long-term growth by creating and leveraging a significantly improved experience for our customers We believe we will be able to drive sell-through of our expanding inventory, which we intend to grow both by making more of our existing supply repeatable and expanding our marketplace to new merchants. We will then amplify these efforts with an improved merchant experience that will support the continued growth of our marketplace. Let me first provide you with an update on our inventory strategy. In our four test markets, we are excited to have exceeded our inventory scorecards, which gives us confidence that our execution of our inventory strategy puts us on a path to growth. Before I go into the details of the test results and what scaling looks like, let me quickly remind you about the inventory test parameter. The goal of our four-market test was to grow inventory and improve both units' and buildings' performance versus our control markets. We believe we could grow inventory by encouraging merchants to list their full catalogs on the Groupon Marketplace and provide customers with a broad portfolio of deals, offers, and market rate experiences. We launched a test so we could first learn and iterate before scaling across the rest of our North American and international markets. The test was divided into two phases. During the first phase, We focused on growing overall inventory by both removing restrictions on deals and launching a new inventory product called Offers, which would target high intent customers and be a lower cost option for our merchants. Our goal was to prove out the first part of our hypothesis, that offering a portfolio of inventory options would open the door for more merchants to sell their full catalog in our marketplace and position Groupon as an always-on sales channel. Before the launch of Offers, Merchants only had one way of working with Groupon, which was often too expensive and ultimately limited the inventory on our platform. While offers provide a lower discount for customers than our typical deal, customers can purchase this type of inventory listing again and again. The second phase of our test focused on driving customer demand and proving the second part of our hypothesis. that having more inventory in the Groupon marketplace would improve the customer value proposition, result in a lift in units and billings, and, longer term, position Groupon to grow purchase frequency and drive customer loyalty. We measured success in the test markets through our inventory scorecard, which focused on both supply and demand metrics. First on the supply side, inventory in the four markets has grown approximately 65% versus our control markets. We're excited that we've exceeded our goal of 50% growth. In addition, we're proving that offers provide a new value proposition that's resonating with merchants. In fact, nearly 70% of the supply growth in the test markets has come from offers. The combination of deals and offers provides a portfolio of listing options for every merchant, no matter where they are in their growth cycle. Next on the demand side, we also exceeded our goal even in the midst of COVID and even before launching significant customer experience improvements we intend to introduce in Q2 of this year. We achieved high single-digit lift in billings and a low double-digit lift in units in the test markets versus control. And while we still have more to learn, we believe these results demonstrate that our improved value proposition is resonating across many customer groups. The units and billing list came from a combination of an increase in customers and an increase in purchase frequency with existing customers. So with these strong test results, we're ready to immediately move into scaling and plan to take a two-pronged approach in 2021. First, we've identified parts of the strategy where we have high confidence and that we can begin scaling now and quickly. And second, we'll continue to test and iterate in other areas before scaling broadly. Let me talk through what we're scaling now. First, we are removing repeat purchase restrictions on deals across all verticals. The restriction we're focused on removing is the inability to repurchase a deal, sometimes within a certain timeframe, sometimes forever. By removing this restriction, we will increase the amount of purchasable inventory in our marketplace and help support our ultimate goals of driving customer purchase frequency higher and increasing customer loyalty. This focus is driven by what our customers and merchants want, and there will be a critical change as we continue to shift our value proposition for customers and merchants and deliver on our promise as a destination for local. In addition, this growth was driven by higher listings per merchant and bringing new merchants onto our platform, demonstrating that our new inventory approach has brought appeal. In the test markets, we found that offers is resonating with both our merchants and customers. In fact, on the customer demand side, offers made up 9% of beauty and wellness sales in the test markets. Customers tend to engage in the same set of beauty and wellness experiences frequently, and we see offers as a great opportunity to help merchants build out loyal customer bases and drive purchase frequency for Groupon. Based on our test market results, we have started rolling out our offers inventory product to all feeding wellness merchants in North America. We expect both our Salesforce and our newly improved self-service tool to play a role in securing this inventory. So let me summarize our top three priorities as it relates to scaling our inventory growth strategy and navigating the pandemic and related recovery. One, we are removing repeat restrictions on deals across all verticals. Two, we are rolling out offers to all beauty and wellness merchants in North America. And three, as we move through the COVID recovery period, we are focused on winning back our merchants that we've lost. Now let me outline where we're looking to learn more. We know that we're differentiated in our things to do vertical and that our dining inventory is valued by our customers. During our test, we saw that when we increased supply in these verticals, it resonated with our customers and increased units sold. These are great early wins, but as you can imagine, COVID has created some noise, so we're gathering more insights on what recovery is likely to look like. In addition to expanding inventory, we also made important progress on modernizing our marketplace in the fourth quarter. I'll take you through a few of the highlights on the merchant side. First, on our merchant self-service tool, we're excited about the progress we've made here over this past year. While this growth is off a small base, in the fourth quarter, we increased the amount of inventory created through self-service by four times versus last year, and at the same time, we're improving the quality of this inventory, with buildings through self-service up seven times. And we continue to make improvements to the tool. During the fourth quarter, we rolled out additional features, including personalized recommendations. For example, we can now automatically recommend pricing, discount levels, and more based on the type of deal or offer the merchant is looking to list. In addition, we launched an integration with Booker, a popular beauty and wellness booking solution in North America. Booker is our first beauty and wellness partner to leverage our Groupon Connect API tool to seamlessly integrate quality, bookable supply into the Groupon marketplace. We are now turning our focus to the customer experience. This means that looking ahead to 2021, we intend to build a significantly better customer experience. One that will leverage and amplify both our expanded inventory base and ongoing improvements to the merchant experience and create a destination marketplace for customers that is highly complementary to the inspiration marketplace that we're already known for. In the past six months, we've learned from our inventory test that we can create a path to meaningful change in our marketplace in a short amount of time. So we are now taking this bold approach with our customer experience as well. I'm excited to share that we've kicked off a product sprint that will allow us to roll out a new customer experience in North America in Q2. This new experience will dramatically improve the customer journey from discovery to search and will focus on driving engagement, conversion, and purchase frequency. Let me give you a few examples of the changes we plan to roll out. First, we'll personalize the homepage to make it easier and more engaging as customers search, browse, and discover experiences. Second, we're improving our search and relevance capabilities in order to do a better job of matching a customer's intent to search results. And third, we'll be launching a feature set that encourages and makes it easier for customers to repeat purchase, which will include driving awareness to customers that we now have deals and offers that can be purchased again and again. Our goal is to roll out this new experience to every Groupon user in North America across our app, mobile web, and desktop, and then expand to international soon after. We have a sense of urgency and believe that time is of the essence as we look forward to a day when our customers have the confidence they need to get back to enjoying all of the local experiences that the Groupon marketplace offers. When this does happen, we want to be ready to deliver a fundamentally improved experience that can help amplify the tailwind of the COVID recovery. So, to bring this all together, let me give you a sense as to what you should expect from Groupon as we continue to execute on our growth strategy between now and the end of the year. On inventory, we'll see continued expansion of our overall available supply with a focus on retaining and, in some cases, bringing back our top merchants, as well as attracting new merchants and removing deal restrictions. Two key goals include increase the percent of deal inventory available for repeat purchase to greater than 80%, and increase the average listings per merchant for beauty and wellness, which is what we're currently scaling offers. By modernizing the marketplace, for merchants, we'll continue to prioritize positioning Groupon as a trusted partner, and for customers, we're making it easier for them to find, buy, and redeem a Groupon. Our goals include continuing to build out tools that will help us be a better partner to our merchants, including our self-service tool, a portfolio of advertising products, including sponsored listings, and new booking tool features that help merchants drive sales on our platform. In short, we want to be the valued resource that merchants turn to when they're looking to start, build, and grow their businesses. And for customers, We believe we will exit 2021 with a new experience that positions us to drive more engagement, increase repeat purchasers, and fundamentally improves the customer journey. In addition to the inventory and marketplace modernization work that I've just outlined, we know that marketing plays an important role in our success. That said, before I touch on the key elements of how we're approaching marketing in 2021, Let me explain how we believe supply, product, and marketing fit together as we work towards unlocking the power of our marketplace. Our brand perception will be led by how our customers and merchants experience our marketplace. This means how much breadth and depth of inventory we make available to customers and how we enable them to interact with our platform, from search to checkout to redemption, which are all components of our brand. As we think about marketing, and in particular brand marketing, we know that any strategy must amplify our marketplace experience. This highlights the importance of first getting the supply and product right on our platform. Then, we intend to leverage the power of our improved supply and product to drive our brand and marketing efforts. As we improve our product and supply, we'll be in a position to deploy more marketing spend in the mid and upper funnel. We believe we can drive awareness and engagement and grow top of mind awareness. Whether this means winning back previous customers and merchants or gaining new ones, we want to be the brand that helps merchants recover and get customers back to experiencing their local merchants. Before I turn the call over to Melissa, I just want to underscore how pleased we are with our progress, which has been driven by our team's relentless focus on execution. This quarter, We not only hit our inventory test goals and continued to improve our marketplace value proposition, but we also stood up a product sprint that we believe will allow us to completely reimagine our customer experience. During the fourth quarter, we recovered to nearly 60% of our 2019 gross profit, and despite the pullback we saw in December, we are confident that our progress has put us on the path to profitable growth. With that, I'll turn the call over to Melissa for a recap of our financial results. Melissa?